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April 22, 2019

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Moody’s downgrades Santa Fe rating

Moody's downgraded the rating on nearly $100 million of Santa Fe hotel-casino debt, warning it could default on a December interest payment.

The rating service said lack of liquidity, poor operating results and cash flow and increased competition led it to lower $99.4 million of Santa Fe's 11 percent first mortgage notes to Caa from B2.

"Due to its minimal cash levels and poor operational cash flow, Santa Fe Hotel may not be able to make its $5.5 million interest payment on Dec. 15 without contributions from its parent, Santa Fe Gaming Corp., or another party," Moody's said.

Andre Carrier, vice president of administration for Santa Fe Gaming, said, "Moody's does what Moody's does. And in the company's nearly 20-year history, Moody's has changed the rating of our bonds both down and up.

"In this case, we don't agree with their decision. We've made significant strides to lower the company's debt levels.

"They seem to focus a lot at the property level and not look holistically at the company, including the parent. They seem to overlook what's at the parent company, which is tremendous asset value.

"We have about $75 million of asset value at the parent level, including about 40 acres in Henderson near the Galleria Mall, another 40 acres south of Sunset Road on Las Vegas Boulevard and the 27 acres they mention in their report.

"I just hope this isn't a disservice to the people we feel most accountable to -- our guests, our employees and our shareholders. And I hope we get as much attention when they decide to upgrade our rating in the future," Carrier said.

Moody's said the Santa Fe resort had only $3.6 million in cash and short-term investments as of June 30, while Santa Fe Gaming's liquidity stood at $7.3 million.

"Cash flow has been insufficient to cover interest expense over the past nine months," Moody's said. Cross-default provisions affecting Santa Fe Gaming and another of its subsidiaries, Pioneer Hotel Finance Corp., were considered in taking the action.

Andrew Susser, Moody's senior gaming-securities analyst, said Santa Fe's problems include competition from the nearby Fiesta and Texas Station hotel-casinos and road construction that has hindered access to the property.

"They've got some really nice amenities, a great French restaurant, a nice lounge and other things, but those are away from the casino area," he said. "I think they've also got what you might call a 'buffet gap' in comparison with Texas Station, for example.

"On the positive side, Santa Fe is well-located near major arteries and is the closest casino to the growing population of Summerlin, at least until Seven Circle Resorts opens in 1998," Susser said.

"As a result, noteholders may be somewhat comforted by the potential attractiveness of the casino on an asset-value basis."

Moody's noted that a Santa Fe Gaming subsidiary owns 27 acres south of the Sahara hotel-casino on the Strip.

"If the parcel is sold, Santa Fe Gaming would have to pay the balance of a $6 million loan currently being serviced by the tenant" -- the theme park Wet 'n Wild.

Santa Fe Gaming also owes $34.8 million in other debts due by 1999 as well as preferred stock obligations, Susser said.

"Any excess proceeds from a sale, however, could be available for a contribution to Santa Fe Hotel or Pioneer," he said.

And, because $20 million of the first-mortgage notes are held by yet another Santa Fe subsidiary, "the noteholder's recovery would be enhanced in a stress-case scenario," he said.